Currencies

U.S. dollar flat to lower on trade view

Rachel Koning

Fed's Greenspan not worried about current-account gap

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CHICAGO (CBS.MW) - The U.S. dollar stabilized against the euro Tuesday but was trading lower against other major currencies after Fed Chairman Alan Greenspan expressed little concern for financial market implosion over a record U.S. current account deficit.

Greenspan said he believed the market should determine adjustments to the current account, a broad measure of trade that includes investment.

He predicted that any correction would be orderly.

Meanwhile, European and Japanese authorities continue to make clear their unhappiness with the dollar's double-digit swoon, which grew in large part out of concern for the trade gap. Yet, analysts caution that the larger trend of a weaker dollar remains.

"Greenspan sounded off a largely unperturbed tone in the face of the dollar decline, clearly not in line with his Eurozone counterpart's stance on the topic," said Ashraf Laidi, chief currency analyst withMG Financial Group.

The euro nosed up 0.1 percent at $1.2761 late in the New York session, after trading mostly flat vs. the dollar in U.S. trading hours. The euro remained well off its brief test of $1.29 on Monday, the highest dollar value since the euro's 1999 launch.

The British pound was unchanged against the dollar $1.8458. The dollar gave up 0.4 percent to the Swiss franc, at 1.2215 francs.

The U.S. currency was 0.3 percent weaker vs. the yen at 106.20 yen vs. the late-New York level of 106.65 yen. A stronger yen during Asian hours put a halt to a two-day rally for Tokyo stocks. See Asia Markets.

European Central Bank President Jean-Claude Trichet "has inaugurated preliminary signs of concerns with the rising euro, a clear departure from last month when the [ECB] described the single currency to be within its long-term average," said Laidi.

"All this suggests that verbal intervention will continue to be largely the work of the European Central Bank and eurozone politicians, with the Fed highly unlikely to step in verbally or operationally."

The U.S. is running a record current account deficit because Americans buy far more foreign-made goods than they export.

So far, foreign investment in the United States has helped to finance that gap. But the dollar has tumbled amid concerns that low U.S. interest rates will eventually turn off overseas investors, putting additional pressure on the greenback.

Little concern from Fed's upper tier

Ultimately, foreign investors will decline to invest so much in U.S. assets that finance American consumption and borrowing, but Greenspan said he expects the adjustment to be relatively benign.

The growth of global trade and financial flows is creating a more flexible global economy that will be better able to withstand shocks and adjustments, he said. "It is imperative that creeping protectionism be thwarted and reversed," Greenspan said. Get the full story.

Greenspan said he felt some frustration that he couldn't address the dollar fall in more detail. The Fed historically leaves currency comments to the U.S. Treasury.

Turning to the U.S. economy during a question-and-answer period, the U.S. central bank chief said slow U.S. job growth was not surprising given the stepped-up workplace efficiency. But he said productivity gains are likely to slow, forcing companies to hire to meet demand.

More concern abroad

Japanese finance minister Sadakazu Tanigaki was quoted by Kyodo News Tuesday as saying that the dollar's fall against the yen was too rapid given the strength of the U.S. economy and that Japan will keep acting against speculative movements in the currency market.

Japanese Ministry of Finance "rhetoric still points to the risk of intervention, but this may decline heading into February's [Group of Seven] meeting," analysts at ABN Amro said in a research note.

Japanese officials have spent record amounts of their reserves to sell yen for dollars on global currency markets in order to slow the yen's appreciation vs. the dollar. A relatively cheap home currency is desired by the Japanese officials in order to keep exports competitive.

Meanwhile, the same export concerns may become a front-burner issue for the European leadership.

Analysts predict the euro could be worth as much as $1.30-$1.35 early this year -- levels that might present problems for the eurozone recovery.

There is concern that euro appreciation "could put a brake on the [eurozone] recovery," ECB council member Ernst Welteke said in a speech delivered in Berlin earlier on Tuesday.

The dollar's tumble has been largely shouldered by the euro, with the dollar's decline vs. the yen countered by Japanese market intervention.

Given a richening home currency's implications for export-dependent manufacturers, European officials are watching the direct and indirect effects of euro appreciation closely, Welteke said, according to media reports.

Speaking Tuesday, a member of the Austrian Finance Minister Karl-Heinz Grasser said he felt the euro's impact on the region's growth was overstated.

"We were not worried when euro-dollar was at 0.82 and we are not worried when it is at 1.29," he told reporters.

The euro fell against its U.S. counterpart Monday after European Central Bank President Jean-Claude Trichet, speaking after the Group of 10 meeting in Switzerland, largely reiterated his comments on volatility, saying "excess volatility and brutal moves were not welcome and not appropriate."

He did tell reporters the bank is "concerned," about currency swings, according to media reports, wording some analysts considered the strongest yet from the ECB regarding its currency's record levels vs. the dollar.

"We're in a phase of consolidation currently, but I don't think the dollar is out of the woods yet," said Armin Mekelburg, currency analyst at the HVB Group bank in Munich.

A rash of U.S. data later this week, including the latest on inflation, capital flows and the trade balance will set a more definitive tone for the dollar, analysts said.

Meanwhile, a weaker dollar helped U.S. exporters raise their prices in 2003 at the fastest rate in eight years, according to Labor Department figures released Tuesday.

Export prices (measured in dollars) rose 2.2 percent in 2003, the most since 1995. Meanwhile, prices of imports (also measured in dollars) rose 1.9 percent in 2003, with petroleum accounting for about half the gains. Get the full story.

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